For many taxpayers, one of the most debated aspects of filing a return is how much can be deducted when it comes to state and local obligations. The State and Local Tax Deduction, also known as the SALT deduction, has been both a financial relief and a point of controversy, especially in higher-tax states.
While the concept sounds simple, the rules around it are layered, and the impact varies widely depending on where someone lives, how much they earn, and the type of taxes paid. That’s why we have come up with this post to help you understand the concept better.
By going through this blog post, you’ll learn how the deduction works, the differences across states, the rules that shape eligibility, and how to approach it strategically while keeping long-term financial planning in mind.
What Are State and Local Taxes?
Before digging into deductions, it’s worth clarifying what qualifies as state and local taxes in the first place. These include:
- State and local income taxes – deducted directly from paychecks or paid quarterly.
- Property taxes – annual or semiannual payments based on the assessed value of real estate.
- Sales taxes – in states without an income tax, taxpayers may deduct general sales taxes instead.
According to the recent data from the U.S. Census Bureau, property taxes alone account for nearly $800 billion collected each year nationwide, making them one of the largest local revenue sources. Understanding these categories helps identify which payments may be deductible and how they fit into overall tax planning.
How the Deduction Works Under Federal Law
The federal tax code allows you to deduct certain state and local taxes when filing returns, but the rules changed dramatically after the 2017 Tax Cuts and Jobs Act (TCJA). That law introduced a $10,000 cap ($5,000 for married individuals filing separately) on SALT deductions.
This means that even if someone paid $20,000 in combined state income and property taxes, only $10,000 can be deducted on their federal return. Prior to TCJA, there was no cap, which heavily benefited residents of high-tax states such as New York, California, and New Jersey.
While the cap was intended to simplify the tax system, it created challenges for taxpayers in high-tax jurisdictions. For many, it effectively increased their federal taxable income, resulting in a higher overall bill.
However, as of 2025, recent legislation, the “One Big Beautiful Bill Act,” has temporarily increased the SALT deduction cap to $40,000, but with a sunset provision returning the cap to $10,000 after 2029.
State and Local Income Tax vs. Sales Tax Deduction
Taxpayers must choose one between deducting state and local income, but not both.
- Income tax deduction is often more beneficial for individuals in states with high income tax rates.
- Sales tax deduction may help those in states without income tax, like Texas, Florida, or Nevada.
For example, considering the Texas state and local tax rate, residents may lean toward deducting sales taxes since Texas has no state income tax. However, the cap limits how much relief they get back at the federal level.
This trade-off highlights how the deduction is not uniform across states but instead hinges on local tax structures.
Property Tax Deduction Rules
Property taxes remain one of the most significant deductible items under SALT. Homeowners paying thousands annually often expect substantial relief, but again, the $10,000 cap applies.
Key rules include:
- Deductible property taxes must be based on the assessed value of real estate.
- Fees for services (trash collection, water bills, etc.) are not deductible.
- Property taxes that are paid in advance can only be deducted in the same year they are assessed, not simply when paid.
The National Association of Realtors reports that taxpayers in high-property-tax states are affected by the SALT cap, underscoring why this has been such a political issue.
Federal vs. State Tax Deduction Differences
It’s important to note that federal and state tax systems don’t always align. While the federal government imposes a cap on the SALT deduction, some states have introduced workarounds to help residents preserve more deductions.
For example:
- Certain states allow pass-through business entities to pay state income taxes directly at the entity level, shifting the tax burden in a way that bypasses the SALT cap for individuals.
- Some states provide state tax credits vs. deductions, effectively reimbursing taxpayers for charitable contributions made to state-run funds, which can then offset local tax obligations.
These measures, while complex, show the ongoing tug-of-war between state governments and federal policy.
Planning for Taxes in High-Tax States
For residents in places with high property or income taxes, the SALT cap requires careful planning. Strategies may include:
- Timing payments of property taxes strategically, though this is limited by IRS rules.
- Exploring whether state-level credits or deductions provide relief.
- Working with a CPA or tax attorney to determine the best combination of deductions and credits available.
It’s not just individuals who are impacted. Businesses also face unique challenges when working with an attorney business tax specialist to structure entity-level taxation, especially in states experimenting with pass-through workarounds.
How Tax Reform Impacts State and Local Tax Deductions
The TCJA changes were originally scheduled to sunset in 2025, meaning the $10,000 cap could expire unless Congress extends or modifies it. This makes the future of the State and Local Tax Deduction uncertain.
If the cap expires:
- High-income households in states with steep property and income taxes stand to benefit most.
- The IRS could see an increase in itemized returns as more taxpayers regain incentive to itemize instead of taking the standard deduction.
According to the Tax Policy Center, only about 9.3% of taxpayers claimed the SALT deduction in 2022, compared to over 30% before TCJA. This drop illustrates how dramatically tax reform reshaped taxpayer behavior.
Common Questions About the Deduction
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Does SALT Deduction Affect Texas?
Since Texas does not levy a state income tax, residents primarily look to deduct sales taxes and property taxes. However, the $10,000 cap still limits relief, meaning many Texans may not see as much federal benefit as expected.
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Can Renters Benefit from SALT?
Renters cannot deduct rent payments, but they may deduct sales taxes or state income taxes, depending on their situation.
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Is It Worth Itemizing Just for SALT?
With the standard deduction set at $14,600 for single filers and $29,200 for married couples (2024 figures), only those with significant itemizable expenses, such as mortgage interest and charitable contributions in addition to SALT, may benefit from itemizing.
Budgeting and Long-Term Tax Strategy
Given the limitations, it’s essential to know how to budget for tax legal expenses and professional advice. Hiring a CPA or tax attorney can help uncover deductions that might otherwise be overlooked. While their fees add to overall costs, the potential savings and risk reduction often outweigh the expense.
A property tax lawyer may also assist with disputes over assessed values, potentially lowering future property tax obligations. For homeowners in expensive regions, this can be a practical way to balance long-term affordability with tax planning.
Final Thoughts
The State and Local Tax Deduction remains one of the most complex yet important areas of tax planning. From property tax deduction rules to the ongoing debate over the $10,000 cap, the landscape is shaped by both federal law and state-level policies. Whether comparing state and local income tax with sales tax deductions, or weighing the benefits of working with professionals, the deduction continues to affect millions of taxpayers each year.
Understanding how it fits into broader financial planning is key. While reforms may alter the details in the coming years, being informed today helps taxpayers make decisions that reduce liabilities and prepare for future changes.